On Wednesday, January 17, the Bank of Canada raised interest rates by a quarter of a percentage point, which came as no surprise to the majority of market watchers because of the strength of the economy which is estimated to have grown 3.0% in 2017. The market consensus seems to be that the overnight interest rate will continue growing this year and will settle at 1.75% by the end of 2018 (three 25 bps rate hikes this year).
Depending on the rate increases in the U.S. and elsewhere, higher interest rates in Canada may strengthen the Canadian dollar. Since mid-December, the dollar has already strengthened from 78 US cents to more than 80 US cents, on the expectations of continued rate hikes.
A strong Canadian dollar would benefit Canadian travelers and importers but may hurt Canadian exporters and the economy as a whole as Canada’s GDP is highly dependent on exports – which account for 31.0% of GDP while the average globally is 28.5% (2016 figures).
A stronger Canadian dollar may hurt, in particular, Canadian oil and gas companies which sell their products overseas but whose labor and extraction costs are priced in the domestic currency. However, the strength of oil prices, which have added almost 50% over the past six months, should support the energy stock prices. Canadian financial organizations, which do business abroad, mostly in the U.S., may also see their bottom lines adversely affected due to the strong dollar. At the same time, Canadian lenders will likely benefit from higher net interest margins as interest rates rise.
This year promises to be interesting for the Canadian stock market as there will be many multidirectional factors at play affecting the stocks. It is advisable to talk to an investment professional to make the best of this kind of market.
Ukrainian Credit Union Limited
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